Japanese automakers' China plans

YoshioTakahashi

BEIJING (MarketWatch) -- Major Japanese car makers are looking to small and low-cost cars for China to catch up with local rivals who are enjoying solid sales growth with such models in small cities in the country's inland regions.

But these were about half the growth of 46% in China's overall market last year, partly as their lineups lack compact and entry-level vehicles that are popular among emerging relatively low-income customers who live in small cities of inland areas and who are looking to buy cars for the first time. Japanese companies including Toyota and Honda have lifted sales in the recent years mainly with solid demand for mid-sized and big vehicles in the coastal cities such as Shanghai.

China is a key booming market for the two car makers to get back on a sustainable growth track, as the country toppled the U.S. to became the world's biggest auto market last year.

The rapidly growing market is critical, especially after the financial crisis dented global auto demand, and the relatively strong yen also squeezes profits that Toyota and Honda earn in one of their big markets--the U.S., where overall auto sales remain sluggish.

For Toyota, working on boosting sales in China is a crucial step as it strives to regain sales momentum dented by its recent global recall of more than 8.5 million vehicles.

Helped by a tax reduction for compact vehicles with 1.6-liter engine or below introduced last year, industrywide sales in inland areas accounted for 54% of China's overall passenger car sales last year, Noriaki Yamada, a managing executive officer at Mazda Motor Corp. (7261.TO), said Friday on the sidelines of the Beijing auto show.

In China, Toyota has its two small models in its lineup--the Yaris compact and the Vios small sedan. Both models are powered by either a 1.3-liter or 1.6-liter engine. Honda sells the Fit compact hatchback with a 1.3-liter or 1.5-liter engine and the City small car with 1.5-liter or 1.8-liter engine.

However, the prices of these models are about CNY90,000 or higher--above the range of those for small cars popular in the inland market.

Toyota and Honda "don't have cars with prices of around Y1 million (about CNY70,000)" needed to entice customers in the mainland regions, Koji Endo, an analyst at Advanced Research Japan, said.

It is not a easy task if they seek to maintain their relatively high quality levels for cheaper models that would be developed with reduced costs, Advanced Research's Endo said. One way to achieve it would be to increase procurement of parts from local suppliers, Endo added.

Ahead of Toyota and Honda, Nissan Motor Co. (7201.TO) said Friday at a press conference at the Beijing auto show that the company will launch the March compact in China in the second half of this year with the starting price of CNY70,000. The March with a 1.5-liter engine uses 90% of its all parts from local parts makers.

With this new compact, Nissan, Japan's third largest car maker by volume, aims for sales of 850,000 vehicles in China this year. This is the biggest sales target for the world's largest auto market among Japan's top three car makers.

"The customer base in the low-price car segment is large. We'd like to consider the timing to launch such a (low-price) car," Masahiro Kato, president of Toyota Motor (China) Investment, told reporters on the sidelines of the Beijing auto show.

He said such a car would be smaller than the Yaris and the Vios, adding that it would be hard to make profits from sales of that car if it were to be made based on an existing model. Toyota may have to develop a completely new model for the small, low-cost car segment to become cost competitive, Kato said.

He hopes to roll out such a low-priced car in China within five years.

Honda president Takanobu Ito said Friday at a meeting with the media on the sidelines of the auto show that his company has no plans to introduce a low-priced small model in China "for the time being" as the company now wants to focus on improving profitability from the current models in the market.

However, "we have been introducing our global cars (sold worldwide) in China. But we can't continue this. We have to work on vehicles that meet local needs...in a more proactive way," Ito said.

Seiji Kuraishi, president of Honda Motor (China) Investment, said that the company will have no choice but to launch a low-cost car with a price of CNY60,000, for instance, as local car makers such as Changan Automobile (Group) Co., and BYD Co. Ltd. (1211.HK) reap sales growth from cars with prices of CNY60,000-CNY70,000.

"But if you ask whether we can launch a CNY60,000 car now, that's impossible," he said.

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